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Is This the Best Stock to Invest in Diabetes?

By Todd Campbell – Mar 12, 2016 at 8:40AM

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DexCom's continuous glucose monitors help diabetics do a better job at controlling their insulin levels.

Image source: DexCom.

Estimates suggesting that over 200 million more people could suffer from diabetes in the next 20 years than suffer from it today have interest in diabetes-treatment companies soaring. Although much of that interest surrounds drugs that could help delay diabetes disease progression to other life-threatening conditions, perhaps the best way to invest in the trend is to focus on medical-device maker DexCom (DXCM -0.81%). Read on to find out why.

First, a bit of background
According the International Diabetes Federation, the population of people with diabetes will grow to 642 million by 2040, up from 415 million today.

That's a staggering figure, especially considering that roughly 5 million people will die from diabetes-related disease this year alone.

The soaring prevalence of diabetes means that the cost to treat the disease is likely to skyrocket from its current $673 billion. IDF reports that diabetes accounts for between 5% and 20% of most countries' total healthcare spending, or an average 11.6% of health expenditures worldwide. Overall, IDF believes that total spending on diabetes could climb nearly 20% -- to more than $800 billion -- in 25 years.

A big reason for the spike in costs is the graying of the global population. People between 50 and 79 years old account for 75% of all diabetes expenditures.

The diabetes epidemic isn't limited solely to type 2 disease in older patients, either. An estimated 500,000 people under age 14 are living with type 1 diabetes, and that number is growing 3% annually.

Combating the problem
Drugs that can improve glycemic control for patients will undeniably play a big role in treatment, and studies evaluating the use of therapies in combination with one another to achieve better outcomes could significantly shift the standard of care in the coming years.

But medicine isn't the only way that doctors, healthcare payers, and patients may seek to limit the blood sugar highs and lows that can lead to organ damage and other health complications.

Technology that provides greater insight into patient blood sugar trends, such as DexCom's blood glucose monitors, could also make a big impact.

DexCom's continuous glucose monitors (CGM) provide real-time data to patients that can better guide them on when its most effective to take their insulin. Typically, the average diabetes patient is outside of the desired blood glucose range approximately 70% of the time, so there's a significant need for devices like this.

Capitalizing on the opportunity
Currently, reimbursement hurdles for type 2 patients mean that DexCom's CGMs are primarily used in type 1 patients, but even in that much smaller sub-segment sales are increasing significantly.

Last year, DexCom reported that sales of its monitors and the disposable sensors they require grew 55% to $402 million. That jump in sales has industry watchers thinking it's only a matter of time before DexCom turns profitable.

In 2015, the company reported a net loss that after adjusting for stock issued to Alphabet's life sciences group, Verily, though it improved to $0.26 per share from $0.30 a year ago. As volume helps mix, analysts think the loss will improve to $0.05 this year.

That improving sales and profit trend may only hint at the future opportunities for the company. In its fourth-quarter earnings conference call, management indicated that investments in R&D, such as its recent collaboration with Verily, could fuel significant product innovation that could broaden DexCom's addressable market.

Last August, DexCom handed over $35 million of its stock to Verily to get its hands on intellectual property that could lead to cheap, small, and disposable sensors that could conceivably remove the need for finger sticks for most patients.

Additionally, investments being made by the company on new production capacity this year could pay off in the form of lower per-unit volume costs down the road, helping profitability.

DexCom also continues to argue its case to healthcare payers, including Medicare, and if DexCom can demonstrate its CGMs can improve patient outcomes and lower long-term healthcare costs, then its monitors could become widely available to type 2 patients who currently have to buy DexCom devices and sensors out-of-pocket.

Looking ahead
Today, investors focus primarily on innovation in medicine for diabetes, but that could change as medical technology gets increasingly sophisticated. If so, then the pace of growth for DexCom could accelerate, but even if the ability to target type 2 patients stays limited, the potential for DexCom in type 1 diabetes is still big -- and for that reason, it's one of my favorite diabetes-related stocks to buy.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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